Positive Ltd (Positive) acquired an 80% stake in Strong Ltd (Strong) on 1 January 20x1. The...

  

Transcribed Image Text:

Positive Ltd ("Positive") acquired an 80% stake in Strong Ltd ("Strong") on 1 January 20x1. The purchase consideration consisted of $2,600,000 cash paid immediately, 500,000 shares in Positive as well as $1,505,200 payable on 31 December 20x1 should Strong increase its sales by 40% in the year ending on the same day. It was estimated that there was a 50% possibility of Strong attaining the required level of sales. The relevant rate of return is 6% per annum. On the acquisition date, Strong had share capital and retained earnings of $2,500,000 and $1,200,000 respectively. Its net assets were carried at fair value in its financial statements except for the following: Building that had a carrying amount of $1,400,000 million was valued at $1,650,000. It had a remaining useful life of 10 years with no residual value. Strong has an internally generated brand name that had been valued at $750,000 by market experts and estimated to have a 15-year useful life. This had not been recorded in the company's financial statements. At the acquisition date, shares in Positive and Strong were trading at $1.80 and $1.30 per share respectively. Positive group adopts the proportionate share of the fair value of the subsidiaries' net identifiable assets in measuring any non-controlling interest. Additional information: Positive extended a loan of $200,000 to Strong on 1 April 20x2 with an interest rate of 4% per annum. Interest for the year ended 31 December 20x2 had not been paid but were recorded in the books of both companies appropriately. Strong sold some inventory to Positive for $80,000 at a margin of 5%. Half of these goods were still unsold at the end of the year. As at 31 December 20x2, Positive's records showed that it owed Strong $20,000 but the latter's financial statements indicated a receivable of $30,000. The difference had been attributed to a payment made by Positive that was still being processed by the bank. The following information was extracted from the financial statements of Strong for the years ended 31 December 20x1 and 20x2: 20x1 S 820,000 Profit after tax Other comprehensive income 20,000 Dividends paid 20x2 S 910,000 (15,000) 40,000 60,000 Other comprehensive income arose from Strong's investment in shares of Grow Ltd ("Grow") in May 20x1. Strong considers Grow's business as complementary to its own and regards the shares as a long-term investment. All dividends paid by Strong had been recorded by all parties accordingly in their respective financial statements. Required: (a) (b) There has been no change in share capital in the companies within the group since the acquisition date. Ignore any tax effects. Record the investment in Strong in the books of Positive by preparing the relevant journal entry on the acquisition date. (4 marks) Prepare the consolidation journal entries for the financial year ended 31 December 20x2. Show all relevant workings to support your answers. (35 marks) Besides Strong, Positive is exploring the acquisition of the entire share capital of a start- up operating in the pharmaceutical industry. One concern that Positive's management has is that though the start-up has a talented team of researchers and scientists as well as the necessary equipment and materials to manufacture products, it currently does not yet have a viable drug in the market. Positive is unsure if this investment is considered as acquiring a business. Advise Positive's management on the accounting treatment of the proposed investment in the start-up with reference to the relevant financial reporting standard(s). (6 marks) Positive Ltd ("Positive") acquired an 80% stake in Strong Ltd ("Strong") on 1 January 20x1. The purchase consideration consisted of $2,600,000 cash paid immediately, 500,000 shares in Positive as well as $1,505,200 payable on 31 December 20x1 should Strong increase its sales by 40% in the year ending on the same day. It was estimated that there was a 50% possibility of Strong attaining the required level of sales. The relevant rate of return is 6% per annum. On the acquisition date, Strong had share capital and retained earnings of $2,500,000 and $1,200,000 respectively. Its net assets were carried at fair value in its financial statements except for the following: Building that had a carrying amount of $1,400,000 million was valued at $1,650,000. It had a remaining useful life of 10 years with no residual value. Strong has an internally generated brand name that had been valued at $750,000 by market experts and estimated to have a 15-year useful life. This had not been recorded in the company's financial statements. At the acquisition date, shares in Positive and Strong were trading at $1.80 and $1.30 per share respectively. Positive group adopts the proportionate share of the fair value of the subsidiaries' net identifiable assets in measuring any non-controlling interest. Additional information: Positive extended a loan of $200,000 to Strong on 1 April 20x2 with an interest rate of 4% per annum. Interest for the year ended 31 December 20x2 had not been paid but were recorded in the books of both companies appropriately. Strong sold some inventory to Positive for $80,000 at a margin of 5%. Half of these goods were still unsold at the end of the year. As at 31 December 20x2, Positive's records showed that it owed Strong $20,000 but the latter's financial statements indicated a receivable of $30,000. The difference had been attributed to a payment made by Positive that was still being processed by the bank. The following information was extracted from the financial statements of Strong for the years ended 31 December 20x1 and 20x2: 20x1 S 820,000 Profit after tax Other comprehensive income 20,000 Dividends paid 20x2 S 910,000 (15,000) 40,000 60,000 Other comprehensive income arose from Strong's investment in shares of Grow Ltd ("Grow") in May 20x1. Strong considers Grow's business as complementary to its own and regards the shares as a long-term investment. All dividends paid by Strong had been recorded by all parties accordingly in their respective financial statements. Required: (a) (b) There has been no change in share capital in the companies within the group since the acquisition date. Ignore any tax effects. Record the investment in Strong in the books of Positive by preparing the relevant journal entry on the acquisition date. (4 marks) Prepare the consolidation journal entries for the financial year ended 31 December 20x2. Show all relevant workings to support your answers. (35 marks) Besides Strong, Positive is exploring the acquisition of the entire share capital of a start- up operating in the pharmaceutical industry. One concern that Positive's management has is that though the start-up has a talented team of researchers and scientists as well as the necessary equipment and materials to manufacture products, it currently does not yet have a viable drug in the market. Positive is unsure if this investment is considered as acquiring a business. Advise Positive's management on the accounting treatment of the proposed investment in the start-up with reference to the relevant financial reporting standard(s). (6 marks)

Answer rating: 100% (QA)

a Positives Investment in Strong Particulars Amount Dr Amount Cr Cash at bank 2600000 Share capital 500000 Retained earnings 1200000 Brand name 750000 ... View the full answer